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Without further ado, let's begin!
Assets
“Asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.”
There are two key points in this definition:
1. Controlled Control means the company can deploy the resource however it wishes. For example, a company can freely decide what products its machinery makes, or leave it idle. By contrast, even though a company can assign a worker's daily duties, the worker can resign — and after resigning, the company no longer controls the worker. On this point:
- Machinery preliminarily qualifies as an asset.
- A worker preliminarily does not qualify as an asset.
2. Future economic benefits The key idea here is whether the company can possibly profit from the resource. For example, a company can use machinery to make products, giving it goods that may be sold for profit in the future — the key word being "may". The goods produced might never actually sell, but because they could currently be sold at a profit:
- Machinery qualifies as an asset.
If that all sounds a bit abstract — put simply, to build a solid foundation you should first understand what each asset you encounter actually is. Here are some common items:
1. Land and buildings / Premises A permanent site for the company to use as an office, shop and so on — giving the company somewhere to operate and earn money.
- Try comparing land and buildings / premises with rent and analysing the differences — we will come back to this later.
2. Equipment Machines and tools provided for staff to use in daily operations — computers let staff process data and communicate; photocopiers handle paperwork. All of these raise the company's operating efficiency and benefit the business.
3. Furniture Likewise, furniture such as desks and chairs is provided for staff to work with, or serves customers in a shop — a display cabinet, for example, showcases merchandise and attracts customers.
- Fixtures and fittings usually appear together with furniture — for example, lighting fittings.
4. Motor vehicles Transport capacity for deliveries, staff shuttles, customer pick-ups and so on. Lorries, vans, private cars and other vehicles are all grouped under this term.
5. Inventory / stock Inventory refers to goods unsold from the previous year, where "goods" means items bought for resale at a profit. Whether an item counts as inventory depends on the company's purpose in buying it. For a car dealer, vehicles held for resale are inventory; for a company that is not a car dealer, vehicles are generally treated as motor vehicles.
6. Receivables / Debtors In daily trading, credit transactions mean goods first, payment later — credit sales, for instance, deliver goods to the customer with payment collected afterwards. Between delivery and payment, the amount the customer owes is a receivable.
- Trade receivables — customers who bought the company's goods or services and have not yet paid — make up the main part of receivables.
- Other receivables (sundry receivables) — parties who owe the company money for other reasons, such as an unpaid sale of old computers — make up the rest.
7. Cash at bank Companies usually open bank accounts to receive and make payments, most commonly a current (cheque) account — so "cash at bank" usually refers to this type of account. Current accounts often come with an overdraft facility, so when withdrawals exceed deposits, the account is called a bank overdraft and is classified as a liability. Besides current accounts, a company may also hold:
- Savings accounts
- Time deposit / fixed deposit accounts
8. Cash in hand The coins and notes a company uses for daily receipts and payments are cash in hand; smaller amounts kept for minor expenses are called petty cash.
Beyond these basic items, you will meet many more assets as your studies progress. The next article covers two other key elements of accounting: liabilities and capital.
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